Analysis: G7 targets causes of market crises, cure elusive

Beyond the immediate challenge of crisis containment, the G7 industrialized nations promised over the weekend to fix the financial market fault lines that are destabilizing the global economy.

Promising was the easy partThe next few months will tell whether the G7 governments can set aside their differences and work together to tackle the root causes of the market turmoil that snowballed out of the United States last August. “G7 credibility will now be more about putting what was said into practice than just saying it,” said a government official who attended the meeting where finance ministers produced the pledges in Tokyo on Saturday. “They’ve got a few months to show they can do it.” The finance ministers of the United States, Japan, Britain, Germany, France, Italy and Canada acknowledged that the economic outlook had deteriorated markedly in recent months, even if they stopped short of predicting a US recession. They vowed to make banks and other financial market players operate in a more open and accountable fashion, following the debt-default crisis in the US sub-prime mortgage market and the global market turmoil it has spawned.

Another fine messSo far, banks have announced over $100 billion in losses and write-downs on investments in sub-prime debt and central banks across the industrialized world are still struggling to keep short-term money markets functioning normally. The sub-prime losses could yet reach $400 billion, Germany’s finance minister, Peer Steinbrueck, said in Tokyo, which goes some way to explaining why the G7 is determined to be seen to be doing something about the underlying faults in the system. “We are deeply engaged in working together to strengthen financial stability, limit the impact of the financial turmoil and address the factors that contributed to it,” the G7 finance ministers said in a statement. They pledged to act on the conclusions of a report from the Financial Stability Forum (FSF), a body created 10 years ago to deal with the aftermath of another financial crisis, in Asia. “We will act expeditiously on its recommendations,” the G7 said, noting that the FSF would produce definitive advice for the G7 to work with by its next meeting in two months’ time. For now, what came out of Tokyo amounts to a wish-list and it remains to be seen if G7 countries can reconcile differences of view when it comes to going beyond declarations of intent.

“The Tokyo communiqué offers the world pabulum in the face of adversity,” said Carl Weinberg of High Frequency Economics, a US investment consultancy. Officials concede that Washington does not share continental Europe’s preference for heavier regulation of markets. Britain, too, prefers the lighter, more hands-off approach that helped make London the financial center it is alongside Wall Street. Among ideas outlined by the FSF in a preliminary report to the G7 was a suggestion that cooperation among bank supervisors, central bankers and financial regulators needed to improve at the national and international level. In addition, credit rating agencies need to do a better job of identifying and evaluating liquidity risk, while capital provisioning rules for banks may need to be bolstered to take account of liquidity risks, the FSF report said.

Positive spinAs French Economy Minister Christine Lagarde put it, a team of doctors was taking charge of the situation now, and closing ranks to prevent malpractice in markets. What was notable in Tokyo was the extent, to which ministers rose above, or hid, the tension that ran rife between Europe and the United States a few days before they met, primarily over the question of crisis prevention. Britain aside, Europe’s sentiment ahead of the Tokyo talks, as expressed most often in private by government officials, was that the US caused the current financial market mess, but had little time for a coordinated international policy response. “This crisis started in America, and as a result of bad management of the American financial system,” one senior European official said, speaking on condition of anonymity. When push came to shove in Tokyo, it seemed G7 countries did not wish to go acrimonious in public just as the state of the economy called for a morale boost. “It’s always times of crisis that breed a greater sense of solidarity,” one European government official said. “And what this meeting shows is there is all the same a dynamic of cooperation.” (Reuters)

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